Nikkei Bearish Bets Rise to Year High Amid Global Rout

By Yoshiaki Nohara and Satoshi Kawano -
Feb 7, 2014

The cost of bearish bets on Japan’s
Nikkei 225 Stock Average surged, touching a one-year high as the
gauge led declines amid a global equity rout.

Puts protecting against a 10 percent drop for the Nikkei
225 cost 6.5 points more than calls betting on gains, according
to data on one-month options compiled by Bloomberg. The price
relationship known as skew rose to 11.2 on Jan. 31, the highest
since Jan. 18, 2013.

The Nikkei 225 has fallen more this year than any other
developed-nation index, slumping 11 percent from a six-year high
reached Dec. 30, as losses in emerging-market currencies stoked
concern that the global economic recovery will falter. Investors
remain cautious before today’s U.S. government-jobs data, said
Allianz Global Investors Japan Co.

“The options market shows the fear that’s spreading among
market participants, with demand for puts being strong because
you don’t see solid, positive catalysts in the near term,”
Kazuyuki Terao, Tokyo-based chief investment officer at Allianz
Japan, said by phone yesterday. His firm oversees about 50
billion yen ($491 million) in assets. “The market is skittish
and vulnerable to bad news.”

Japanese shares have led a global retreat that has erased
about $2.3 trillion from equity values worldwide this year amid
emerging-market volatility, signs of slower growth in China and
stimulus cuts by the Federal Reserve. The yen capped the biggest
monthly rally since April 2012 against the dollar last month.

U.S. Jobs

The U.S. Labor Department may report today that businesses
added 180,000 employees in January after a 74,000 increase in
December, according to the median forecast of economists
surveyed by Bloomberg. A private report on Feb. 5 showed
companies added fewer workers than projected last month as
colder-than-normal weather limited progress in the job market.

The Nikkei Stock Average Volatility Index fell 2.5 percent
to 29.98 today after jumping to a seven-month high on Feb. 4.
The VStoxx Index, which tracks Euro Stoxx 50 Index options
prices, lost 8.2 percent to 20.80 yesterday. In the U.S., the
Chicago Board Options Exchange Volatility Index, or the VIX (VIX),
reached its highest level since December 2012 on Feb. 3.

The Nikkei 225 capped the biggest annual rally in four
decades in 2013 as the central bank’s monetary easing helped
weaken the yen, boosting the earnings outlook for exporters.

Investors are weighing whether Prime Minister Shinzo Abe
can ignite the equity market with his so-called third arrow of
growth initiatives aimed at making Japan’s economic recovery
sustainable.

Stock Selloff

Abe is calling on firms to boost salaries to sustain a
reflationary effort so far driven by stimulus and the yen’s 18
percent drop against the dollar last year. Wage increases aren’t
keeping up with rising prices, posing a risk to consumer
spending as the nation girds for a higher consumption tax set
for April.

The selloff in Japanese stocks will come to an end soon
because the nation’s growth recovery remains solid and company
profits are improving, according to Nissay Asset Management
Corp., which oversees about 6 trillion yen.

“When you look at the domestic picture, you can tell
Japanese shares won’t fall much from here,” Isao Kubo, a Tokyo-based equity strategist at Nissay Asset, said by phone on Feb.
5. “Investors are done with selling. The market won’t fall
because of domestic factors, and earnings are going well,
especially for exporters.”

Earnings Season

Of the 222 companies on the Topix index that have reported
quarterly earnings since the beginning of January and for which
profit estimates are available, 64 percent beat analyst
projections, according to data compiled by Bloomberg.

Implied volatility, the key gauge of options prices, for
one-month options with an exercise level 10 percent below the
Nikkei 225 rose to 36.1 on Feb. 4, the highest level since July
29. The measure closed at 33.7 yesterday. The gauge for calls 10
percent above the index ended at 27.2 after reaching 27.6 on
Feb. 4.

The volume of Nikkei 225 puts (NKY) climbed to 98,863 on Feb. 4,
the most since June, according to data compiled by Bloomberg.
There were 1.67 million options giving the right to sell the
gauge, compared with 1.89 million calls, data compiled by
Bloomberg show.

Investors will probably keep hedging against losses in
Japanese stocks before a series of events including the U.S.
jobs data and Janet Yellen’s first appearance before Congress as
Fed chairman next week, according to Goldman Sachs Group Inc.

Net Sales

Foreign investors sold a net 740 billion yen of Japanese
shares in the week ended Jan. 31, the most since June 2010, data
from the Tokyo Stock Exchange show. They boosted holdings by a
record last year.

“As long as concerns over emerging nations linger, it’s
hard for investors to take positions, and so this is not the
time they will unwind puts,” Naohide Une, Tokyo-based head of
equity derivatives trading at Goldman Sachs, said by phone on
Feb. 5. “As we await important data and events overseas, it
seems investors are scrambling to reduce risk after many of them
overweighted Japan. That’s pushing up demand for puts.”